There has been a profound transition in the Indian entrepreneurial mindset who are no longer chasing to make clones of successful US businesses, says Chamath Palihapitiya, founder and CEO of the Silicon Valley-based venture capital firm Social Capital.

In an interview with ETtech's Vikas SN, Palihapitiya talks about why fintech on top of India Stack is the next big opportunity, India's hyper competitive Internet market and the government's approach to startup ecosystem. Edited excerpts -

How do you think Indian startup ecosystem has progressed?

There has been a pretty profound transition in the entrepreneurial mindset here. 3-4 years ago, there was almost like a gold rush mentality to raise money that the easiest way to raise money was to basically represent yourself as an analog of an American success story. I think we finally have made this transition now where that isn't necessary.

As a result, there is less capital flowing in. So the velocity has slowed but the quality of capital is higher. The reason is because the capital is more patient and more sympathetic to ideas or businesses that may not necessarily have an obvious Western analog. That's a really crucial step in making sure that this ecosystem is sustainable.

Hence, I am even more bullish than I was before. The spectrum of innovation has expanded and what's great is that we are now operating across many verticals.

When you look at an idea, do you look at companies which are solving local problems or companies which have a global mindset?

I only look for local ideas. My initial filter has to be if this is presented to me as a blank for India, I immediately become quite skeptical. I don't think that's the right mindset if you are going to create something new.

So, are you seeing more startups solving more local problems now as compared to an US clone?

I do. I am a huge fan of Aadhaar and India stack. But that itself as an example has no clear explanation in any part of the world. So an entrepreneur has to do decide that there is a business opportunity here that enables that frankly is so unique that it is worth pursuing.

I think there are so many opportunities now to build endemically Indian businesses.

Do you think these businesses can sustain with India as its sole markets?

Absolutely, India has these secular tailwinds that are undeniable. We have a secular tailwind of a massive young population that is going enter its peak earning period over the next 30-40 years.

Another tailwind is we have a massively expanding economy. Also, we are moving to a place where business can be done more easily because it is going to largely paperless. When you take all of those things together, you are creating a liquidity for innovation, capital, consumption. The boundary conditions here are way better than any other country in the world.

What do you think of the fintech opportunity in India?

I think that is the most obvious, important and near term business opportunity. The reason is because all boundary conditions exist in fintech that are not in other places. You don't have to deal with physical infrastructual vagaries. You also have an elegant abstracted set of technologies that you can use to build your product that we now know that government supports in its entirety.

You can do things absolutely virtual and your customers are in a position to adopt these things with very little friction. To me, fintech and specifically building on top of India Stack is the most obvious one.

Apart from Fintech, are you looking at any other investment opportunities?

There is a lot of interesting things happening in Enterprise SaaS. I was actually surprised at the quality and the scale of some of the things happening here. The benefit that the India has is dramatically better unit economics than an equivalent business in USA, so they are much more fundable.

There are also a lot of clever things happening in healthcare but the go-to-market is challenging. Education segment is also interesting but the long term monetization is challenging.

So you ask me to draw a line, I would draw the line below Fintech and enterprise SaaS.

Reliance Jio recently launched its 4G service. Do you think that will have an impact on the startup ecosystem?

Unbelievably transformational. You've seen what basic access to high speed Internet has done for innovation in countries like America. If you take that as a proxy and have 70%, 80% or 90% of the country blanketed by 4G, the opportunities here will be incredible.

What is your take on Indian government's approach to the startup ecosystem in India?

I think the Government has a really fantastic approach here. They go to the absolute bottom of the stack and have been building the core foundational infrastructure and they've created a regulatory & legislative framework that is very supportive and conducive to Innovation.

They have taken an agnostic view for innovation, which is very critical, since you just don't know what the winning idea will be.

They have also not allowed people to try to get protectionist. This is necessary because you want Indians, MNCs and all kinds of companies to enter the market and spend billions trying to create the future.

Considering Indian market is hyper competitive right now, be it Flipkart vs Amazon or Ola vs Uber, do you think capital/value will get created here or destroyed?

These companies are unbelievably important for couple of reasons: they are proving that there is real demand around these core behaviours. So it is a massive market validation.

The other thing is more esoteric. It provides a roadmap for young Indians entrepreneurs to say I don't need to go to America or a US grad school, I can stay here. In many ways, these guys represent India's version of Alibaba and Tencent. Really clever, thoughtful courageous entrepreneurs who have lived their whole lives here and are trying to build something special.

Exits are still an issue in India, when do you see them happening?

Exits and liquidity are crucial for an ecosystem to thrive. It's not just liquidity for investors. Frankly, that is less important, it is liquidity for employees who commit all their time and future implications. Some of the employees will be leaving to start their next company.

But to have liquidity, you have to have a profitable & growing business. For that, you need to have a very strategic thoughtful approach to business model construction.

My issue in the last few years has been, when we cater to American investors, we are giving up the ingenuity that we have to design our own business model. When the unit economics are bad because we've been copying something, we put ourselves into a situation, its difficult to see a path of liquidity.

That's why I think there is now an increasing number of businesses that have taken very India-specific approaches, that can't be easily replicated by competitors. This allows them to create pricing power which is crucial for healthy unit economics.

How are you looking at India market for future investments?

We've been investing a lot of money into Ezetap. We've also given a lot of Prime Venture Partners, because we like the work they do. We continue to look at everything because we are waiting for the right moment in time to really deploy hundreds of millions and eventually a billion or more dollars over the next 5-10 years.

The problems thus far has been that all of the investable opportunities has been at valuations and unit economics that I felt very uncomfortable about. So, my decision was, let's just invest in the things that are working as far down the stack as possible and just be patient that over the next 4-6 years, as those business mature, it will enable all these other companies that we want to invest in. I expect to be coming to India 3-4 times a year for the next few years.